Can You Discharge Student Loans in Bankruptcy? Sometimes.
To discharge student loans in bankruptcy, a filing Chapter 7 or Chapter 13 debtor must reach an extremely high bar. Student loan debts are specifically excepted from the discharge of debts resulting from a successful bankruptcy petition by section 523(a)(8) of the US Bankruptcy Code. This section contains several important components to those considering bankruptcy. It covers:
- Any educational benefit overpayment or loan that is ...
- Made, insured, or guaranteed by the government or a governmental unit ...
- Or also any obligation to repay funds received as an educational benefit, scholarship, or stipend ...
- Or any other educational loan defined as a "qualified education loan" by section 221(d)(1) of the Internal Revenue Code of 1986.
Thus, any debt which falls into part or all of this provision is unable to be discharged by bankruptcy—unless, as section 523(a)(8) states at its outset, the debt causes an "undue hardship" on the debtor or the debtor's dependents. Additionally, section 221(d)(1) of the Internal Revenue Code also defines a "qualified education loan" as any debt incurred solely to pay for higher education expenses. The two primary arguments that a student loan should be discharged in any given circumstance, therefore, are that (1) the debt causes an undue hardship and (2) the debt is not the result of a "qualified education loan." There are other associated and included conditions as well, but these are the general arguments available. Both, however, offer extremely high bars to discharge student loans in bankruptcy. To discharge student loans in bankruptcy in the Michigan Eastern and Western District Federal Bankruptcy Courts, a base Chapter 7 or Chapter 13 case listed the student loan debt as "dischargeable" must first be filed, and then an actual lawsuit against the student loan lender seeking a declaratory judgment from the judge in the base bankruptcy case that the student loan may be discharged. Student loan lenders do defend such lawsuits, sometimes very aggressively.
Discharge Student Loans: Undue Hardship
As to the undue hardship argument, the courts have rendered multiple decisions on the subject that make it very difficult to establish that an "undue hardship" has indeed been imposed by the debt. The basic test (known as the Brunner Test) for undue hardship is:
- If the debtor is unable to maintain a "minimal" standard of living for the debtor and his or her dependents based on current income and expenses;
- If the debtor's general circumstances indicate that this state of affairs isn't likely to change throughout the life of the loans;
- And if the debtor has made good faith efforts to repay the loans.
It doesn't sound that difficult, but, time and again, courts have ruled against debtors seeking discharge on this basis. Very low-income debtors have the best chance of success, particularly those with some level of disability preventing them from working on a permanent basis. Simply being unable to pay will not meet the undue hardship test to discharge student loans.
Discharge Student Loans: Qualified Education Loans
The argument that the loan is not a "qualified education loan" is a possibility when a loan has been used for living expenses in addition to "higher education expenses," but the possibility that an argument based on this statutory wording will result in a complete discharge is uncertain at best. Recent case-law in bankruptcy courts has also taken a harder look than in the past at for-profit (alleged) educational institutions, whether they are accredited in any way, whether the program undertaken by the student, for which the loan was extended, was in any way conceivably likely to result in an actual offer of employment post-graduation, now or ever. (My favorite example of such dubious programs are the spate of "crime scene investigation" associate's degree programs that appeared shortly after television programs such as CSI: Miami became popular. Statistically speaking, there are NO such jobs!)
Discharge Student Loans: Every Case Is Different
There are, however, many additional arguments to be made on a case-by-case basis, and a knowledgeable Michigan bankruptcy attorney, such as Attorney John M. Hilla with The Hilla Law Firm, should be able to determine whether your student loans are, as most unfortunately indeed are, truly non-dischargeable—or if your case may offer a possibility for real discharge and relief. Further note: Some of the problems and causes of students' wildly increasing student loan bills were discussed on NPR's On Point with Tom Ashbrook radio show with author Alan Michael Collinge, whose new book, The Student Loan Scam, discusses the unholy relationship between student loan lenders, university financial aid administrators, and the US Congress in a most enlightening and, sadly, disheartening, manner. We recommend both this radio show and book for further information on the problems of the student loan lending industry and the growing "student debt bubble." Please contact your Congressman and Senator, further, to support legislation introduced by Senator Dick Durbin of Illinois making private student loans dischargeable in bankruptcy again, just as they were before Congress implemented the 2005 BAPCPA Bankruptcy Code amendment, which was largely drafted by financial institutions. If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.